Introduction

September 30, 2011

A payday lending business with ties to Indian tribes successfully dodged allegations for years that it violated state lending laws. But now, a U.S. district judge has dealt the online business a defeat, ruling in a lawsuit that the company broke federal law by deceiving borrowers about how much they’d have to repay.

The Federal Trade Commission, which brought the lawsuit, will now ask U.S. District Court Judge Gloria M. Navarro of Nevada to order the company and others involved to repay borrowers tens of millions of dollars in illegal charges.

The Center for Public Integrity and CBS News exposed in 2011 that Scott Tucker, a convicted felon turned professional race-car driver, started the online lending business, now known as AMG Services of Overland Park, Kan. Tucker turned to three Indian tribes in Oklahoma and Nebraska when the attorney general of Colorado tried to shut his business down.

The Miami and Modoc tribes of Oklahoma and Santee Sioux of Nebraska successfully argued in state courts they have sovereign immunity, so states cannot take their businesses to court, even if operated off the reservation or over the Internet.

However, the FTC in 2012 filed a lawsuit against AMG Services, Tucker and others arguing that tribal sovereign immunity doesn’t apply to the federal courts. Navarro recently sided with the FTC on that point.

On May 28, Navarro ruled further that AMG Services violated the Truth-in-Lending Act by misleading borrowers about the interest they would owe. In a typical case, the company would tell someone borrowing $500 that they would only have to repay $650. But in reality, the company would rely on confusing language deep in the fine print to automatically renew loans borrowers thought they were paying off, the judge ruled. So a $500 loan could actually cost the borrower $1,925.

Navarro noted that the company’s own training material encouraged employees not to explain the true cost of the loan to borrowers.

“I think we should leave out terms like renew and pay down,” a company trainer wrote in an email. “We don’t want to complicate things if we are trying to get them to get a loan.”

“Like any other contract, payday lending contracts must disclose the true cost consumers will pay,” Jessica Rich, head of the FTC’s Bureau of Consumer Protection, said in a statement. “This is especially important because many consumers who take out payday loans calculate the amount they can afford to pay down to the dollar.”